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Some Empirical Observations on the Forward Exchange Rate Anomaly

  • Derek Bond

    ()

    (University of Ulster)

  • Michael J. Harrison

    ()

    (Department of Economics, Trinity College)

  • Niall Hession

    (University of Ulster)

  • Edward J. O'Brien

    ()

    (Department of Economics, Trinity College and CBFSAI)

This paper looks at issues surrounding the testing of fractional integration and nonlinearity in relation to the forward exchange rate anomaly of Fama (1984). Recent tests for fractional integration and nonlinearity are discussed and used to investigate the behaviour of three exchange rates and premiums. The findings provide some support for I(1) exchange rates but suggest fractionality for premiums, mixed evidence on cointegration, and a strong possibility of time-wise nonlinearity. Significantly, when the nonlinearity is modelled using a random field regression, the forward anomaly disappears.

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File URL: http://www.tcd.ie/Economics/TEP/2006_papers/TEP1.pdf
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Paper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number tep2006.

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Length: 25 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:tcd:tcduee:tep2006
Contact details of provider: Postal: Trinity College, Dublin 2
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